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Ingram Micro (IM): Leaked Documents Could Jeopardize Buy-Out

by Sonya Colberg, Senior Editor - 12/1/2016 9:43:55 AM

TheStreetSweeper issues an investor alert for Ingram Micro (IM).

Leaked Chinese government documents indicate the $6 billion acquisition of Ingram could be in trouble.

In February, Ingram Micro announced China-based Tianjin Tianhai Investment would pay $38.90 per share cash to acquire Ingram.

But now a China-based company will not be allowed to acquire a company for $1 billion or more that is not within their core business, suggest new Chinese regulations leaked to the Chinese media.

Under the buyout deal, Ingram Micro would become a subsidiary of China-based HNA Group specializing in logistics, aviation, financial services and tourism. HNA is a major shareholder of Tianjin Tianhai, which focuses on shipping, logistics and financing.                

California-based Ingram Micro would be outside the Chinese companies' core business because it is an information technology company.

Below is a partial copy of the photographed document said to be from the People's Bank of China conference record, indicating the central government likely has already passed the regulation on to the bank. It's not perfectly clear whether the restrictions would institute an actual ban or more intensive scrutiny, but the economic issues demand that China reduce its capital outflow:

(Source:mt.sohu.com)

Translated, the relevant portions state:

This is primarily targeting six types of foreign investments through supervision and control. Filing and approvals are not permitted (unless with the approval of the appropriate departments).

The measures have been approved by the State Council, the Ministry of Commerce, Development and Reform Commission is responsible for the implementation of concrete measures will soon be issued.

Six categories of business include:

1) State-owned enterprises purchase or develop large-scale real estate with Chinese investment of US $ 1 billion and above; large-scale mergers and acquisitions of non-core businesses with Chinese investments of US $ 1 billion and above; and Chinese investments of US $ 10 billion and Of the large amount of foreign investment projects; investment in the amount of 1 billion US dollars (inclusive) or more non-main projects large M & A investment projects;

2. Direct investments of partnerships 

3. Purchasing of stocks under 10% of foreign companies 

4. Using subsidiaries to acquire foreign companies 

5. Chinese investment groups taking foreign listed Chinese companies private

..With regards to existing investment projects which are approved by the National Development and Reform Commission, the guideline mentioned above should be followed... Filing and approvals are not permitted (unless with the approval of the appropriate departments.)

Our interpretation, along with that of reputable third-party Chinese speakers, is that other government departments must follow the "no filings" and "no approvals" guidelines. The exception would be if undefined "relevant departments" have already approved the foreign investment.

The South China Morning Post states the massive policy shift which would place tighter controls on overseas investing would be effective from now until September of next year.

The declining value of the yuan, as documented in numerous news stories, has pressured China to cut down on assets flowing out of that country.

Since the documents are in Chinese and have just been leaked, we believe very few U.S. investors are aware of the regulations that could doom Ingram Micro's acquisition.

*2. Other Chinese Buy-Outs Suffer

The leaked documents reached the ears of some investors in Changzhou, China-based Trina Solar (TSL), a billion-dollar company which sells solar products to power plants and grid operators.

The company had received a definitive agreement from the parent company to pay $11.60 for each American depositary receipt under a take-private deal.

The stock had been trading around $10.33 over the past month but reacted quickly following a couple of tweets Nov. 28 about the leaked documents:

 

(Source: Twitter)

... and the price is still down significantly.

(Source: Yahoo Finance, TheStreetSweeper)

China's iKang Healtcare Group (KANG) - which has a recent take-private history - also suffered a significant decline in share price after the documents were leaked in China.

(Source: Yahoo Finance, TheStreetSweeper)

*3. An Asymmetric Bet

We also believe Ingram offers a good asymmetric bet. The buy-out price is $38.90. Now the stock is trading for about $37.44.

Before the buy-out, the stock was trading for about $28 per share, below which the stock could fall if the merger falls apart. This would allow investors to make about 25% on that short.

Also, there's been heavy "put" buying over the last few days.

(Source: Bloomberg)

Comparing the Nov. 29 (0Int) and Nov. 25 (OInt 3), some interesting short features arise:

Open interest in the Dec. 16 $39 put increased to 8,554 on Nov. 29 from just 16 four days earlier.

Open interest in the Jan. 17 $39 put jumped to 1232 on Nov. 29 from 0 four days earlier.

The total $39 puts in December and January equals $36.6 million.

Here's another look at the put buying concentrated in the last three days:

(Source: Trade Alert)

Also, as the snapshot above indicates, on Nov. 30 an investor signaled a strong belief in the short opportunity by purchasing 1,000 puts for $0.40 per contract at a $35 strike price.

*4. Analysts Unaware

It appears that most sell-side analysts are sitting back, assuming the buy-out will go through. This opens up more opportunity for people who do know about the Chinese restrictions.

(Source: Bloomberg)

Even before the document leak, insiders have been dumping the stock.

(Source: Bloomberg)

*Conclusion

Most U.S. investors - including sell-side analysts - are unaware of the leaked documents containing new Chinese restrictions that could doom Ingram Micro's buyout. The stock shot up on news of the buyout and now we believe the new information will kill the stock. We expect the stock to collapse by at least 25%.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in IM and stand to profit on any future declines in the stock price.

  • Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.
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